Brazilian Car Rentals: Will new car prices decrease?

The potential for new car prices to drop is one of the most common topics among car rental investors. The value of the industry's main asset is not only used to measure ROIC and tariff calibration, it is also important to estimate vehicle depreciation. For car rental companies, the depreciation equation is a result of: 1) expected used car prices in the future; 2) discounts with OEMs; and 3) SG&A costs. However, as a substitute good for used cars and highly correlated, new car prices are closely monitored. Contrary to market expectations, we do not expect new car prices to drop in 2023 due to: 1) regulatory factors; 2) industry capacity utilization; and 3) brand reputation risk.

A new car price decrease may harm a carmaker's reputation, reducing the value of used cars and impacting future sales, along with overall market share.

Despite frequent media reports projecting car price deflation, according to historical data, prices have fallen just twice in the past 20 years. Both instances resulted from reductions in the Industry Tax (IPI), which led to lower prices for new vehicles. Last year, a similar tax reduction was implemented but did not result in a price decrease.

Supply chain effects have caused car prices to rise to a new base, which we expect to persist. As of 2023, data from car manufacturers shows that the average price of the 10 most affordable 0km models has risen 8.8% YoY. We estimate prices will continue to increase in 2023, albeit at a slower pace, due to:

1. regulatory factors;
2. industry capacity utilization; and
   
3. brand reputation risk.